Sponsored by The Hayes Law Firm

Scalping

July 10, 2007

On July 9, 2007, the Securities Exchange Commission (SEC) filed securities fraud charges against Darrel and Jack Uselton in the U.S. District Court in Houston for perpetrating "a high-tech scam that hijacked personal computers nationwide to disseminate millions of spam emails and cheat investors out of more than $4.6 million." (SEC Litigation Release No. 20187, July 9, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20187.htm.

The fraudsters perpetrated what is commonly called a "scalping" scam. "Scalping refers to recommending that others purchase a security while secretly selling the same security in the market." (SEC Litigation Release No. 20187, July 9, 2007)

More precisely, scalping is when a stock broker or financial adviser recommends that an investor buy a security--and then sells that security at a profit immediately after the recommendation has been disseminated and investors have driven the price of the security up with their purchases.

In 1963, the U.S. Supreme Court held that scalping was fraudulent market manipulation and a violation of the Investment Advisers Act of 1940. SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963).

Darrel and Jack Uselton obtained shares from a number of penny stock companies. Then they sent out millions of spam emails saying those particular penny stocks were good investments. This created an artificially active market. Then the fraudsters sold their penny stock for a profit. (SEC Litigation Release No. 20187, July 9, 2007).

The Useltons were able to send out the millions of emails by using something called "botnets," which is short for "proxy bot networks." Botnets are "networks comprised of personal computers that, unbeknownst to their owners, are infected with malicious viruses that forward spam or viruses to other computers on the Internet." (SEC Litigation Release No. 20187, July 9, 2007).

Scalping is very similar to what is called the "pump and dump scam." The pump and dump scam is a form of securities fraud that involves artificially inflating the price of a stock or other security through untrue or exaggerated promotion in order to sell stock, previously purchased cheaply, at the inflated price. When the promotion stops (or flaws in the promotion are exposed) the artificial demand is removed. This causes a collapse in the price of the investment, and the other investors lose their money.

STEP 1: ACQUIRE STOCK AT CHEAP PRICE: The people behind the pump and dump scam acquire a large number of stock (usually thinly traded, penny stock) at a cheap price in a particular company.

STEP 2: PROMOTION: The perpetrators artificially inflate the price of the stock through a promotion campaign based on untrue and exaggerated statements. The most common vehicle for pump and dump promotion is Internet spam.

STEP 3: PUMP UP THE PRICE: In response to the fraudulent promotion, investors purchase the stock in droves, creating a high demand.

STEP 4: DUMP ARTIFICIALLY INFLATED PRICE: The persons behind the scam sell their shares at the artificially inflated price and make a large profit.

STEP 5: PRICE PLUMMETS: The scam artist stop promoting the stock and the price plummets. As a result, the other investors lose their money.

Have you or someone you know been the victim of securities fraud. THE HAYES LAW FIRM is a plaintiff's firm with a focus on securities arbitration. The HAYES LAW FIRM represents defrauded investors all across the country. Please contact us at 1-866-332-3567 and visit our web site at www.dhayeslaw.com.